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“Known Unknowns” in Global Supply Chains

June 02, 2014 - SCMR Editorial

Editor’s Note: Tony Cragg is a Senior Lecturer at ESLI, a specialist graduate school of Industrial Logistics which is part of ESC Rennes School of Business, France. He is currently studying global supply chains in the French agricultural machinery sector as part of his PhD with Westminster University in the UK. His research interests include SME’s, sourcing strategies, globalization and supply chains. Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a former Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France.

You may know who your supplier is, but the chances are that you have no idea who your supplier’s supplier is.

The European Horsemeat scandal and the Rana Plaza clothing factory collapse in Bangladesh are just two recent examples of companies not knowing the sources of the products they sell with disastrous consequences. These “known unknowns”, in “Rumsfeldian” terminology, are the direct consequence of the splitting up and subcontracting of manufacturing on a global scale through a series of intermediaries and agents. A trend which began with companies distancing themselves from any responsibility for manufacturing in the 1990’s to focus on their core activities of marketing and design.

We live in a world where supply chains are increasingly internationally fragmented. The financial crisis caused a slight blip but the trend is towards a faster rate of growth for international fragmentation than regional fragmentation. Research shows that since 1995 the share of value added generated globally across a range of different product groups has been rising steadily from 1% in 1995 to 18% in 2011 . Regional value added is growing more slowly. In other words in the last twenty years western countries have been increasing their sourcing from China and other countries with extremely low labor costs and these countries have been upgrading their activities: moving into higher value-added manufacture.

The risks of global sourcing in the textile and food industry are well known. So let’s take another manufacturing product group, basic and fabricated metals. Here the foreign value added share increased from 17.7% in 1995 to 30.2% in 2008. These metals are included in the manufacture of automobiles and a range of other machines which undergo final assembly in Europe. Let’s consider the situation of a medium sized European manufacturer of agricultural machinery who is faced with the choice of sourcing component parts locally or globally. Local is more expensive but known, whereas global is cheaper but unknown. The statistics, as cited previously, suggest that increasingly the decision is being made to buy those axles and welded parts globally.

In order to source from China an intermediary is hired (in Europe, probably known or in China, certainly less well known) who deals with an unknown supplier. The more global the supply chain becomes, and the more intermediaries between your company and the original supplier, the less you know about the quality of that component. Trust is diminished. Bigger companies in the machinery sector are able to invest time and resources into training and monitoring suppliers but this cannot be said for the plethora of small and medium sized Western manufacturers. They struggle to control their global supply chains and they have no idea of who their supplier’s supplier is.

Does any of this matter if costs are being driven out of the supply chain, so that machines and eventually the food we eat are produced more cheaply? Well, yes for two reasons: first local suppliers go out of business, with a permanent loss of skills and knowhow and secondly the lessons from supply chain disasters in the food sector are that the more globally fragmented a supply chain becomes, the greater the risk of quality failures.

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